On Marginal-Risk Behavior

Abstract

This paper examines marginal-risk behavior in a decision-theoretic setting that is sufficiently general to accommodate any decision-making model representable by a certainty equivalent. The analysis shows that risk aversion in its usual sense is a special case of marginal-risk aversion associated with mean-preserving changes in gambles. Thus, marginal-risk behavior and risk behavior are not inherently different. Rather, they manifest similar behavior evaluated at different gambles. The paradox of marginal-risk-loving risk averters arises from mixing definitions of an “increase in risk.”